These last few months, during this latest mortgage boom, where many people are refinancing their old loans into new ones, with rates at low 4, the same question comes up every time. How much do you think your house is worth?

Every time I ask this question, I realize more and more that very few homeowners know the answer, and for good reason: values ​​change monthly, making it nearly impossible to estimate how much an appraiser will value your home.

In the past, the first thing I’d do was call one of my appraisal colleagues and have them come in to appraise the house, and when the value was known, I’d be able to determine which lender and loan program would best fit a client’s situation.

A loan for a client with 20% equity in their home is quite different than for those with less than 20% equity, and many homeowners today are on the brink of collapse. Unless I know for sure what a customer’s loan is worth, with all good intentions, I can’t know which loan program would best fit that customer’s needs.

Loan to value is pretty self explanatory. It is the amount of the loan compared to the value of the house. A person with a loan of $200,000 and a home value of $250,000 will have a loan to value of 80%. Someone with a $150,000 loan and a $250,000 home will have a 60% LTV, etc.

Unfortunately, these days, the lending industry has put up a huge hurdle that prevents me from having an appraiser come in early in the process and appraise a client’s home. These days, I first have to choose a lender to work with, and then the lender selects an appraiser through an Appraisal Management Center, or AMC, with which they have registered. It is the responsibility of the AMC to select the appraiser.

While this prevents the loan officer and lender from reaching or influencing the appraiser, it is nothing short of a nightmare. For example, one client thought his house was worth $260,000 and his LTV would be less than 80%, actually around 70%, meaning they were going to get a regular conventional loan. However, when the appraiser came out, he ended up only putting $230,000 worth on his home, so the borrower actually had a 92% LTV. Well, this changed the product that was best for them from a conventional loan to an FHA loan. FHA loans cater to those with an LTV of more than 80%, where they owe more than 80% of the value of their home.

The appraiser had to make some changes to the appraisal to fit the FHA guidelines, which are stricter than conventional guidelines. This wasn’t too bad and the appraiser received an additional $150 on top of his $425 fee to make the necessary changes for the FHA.

However, this is where the real cost to the borrower begins to be exposed. With a conventional loan, the higher the credit score, the fewer fees the borrower will be charged. When this borrower thought he had a conventional loan, I told them how they could improve his credit. In this case, it cost them a few thousand dollars, because they had to pay off credit card debt to get a more favorable score from the credit bureaus.

When we found out that their home value had dropped so low that they didn’t qualify for a conventional loan, but only qualified with the FHA, the whole exercise of improving their credit scores turned out to be a waste of time and money. This is because the FHA sets a minimum credit score and does not penalize a borrower for a lower score unless it is very low, well below what my borrowers already had.

More specifically, my borrowers had credit scores of 677 and for a conventional loan they needed at least 680 to pay for much lower closing costs, whereas with FHA, any score above 640 was fine because their program doesn’t rely as much on the credit score.

The bottom line of this example is: If I had been able to determine the value of your home first, before the loan had to be presented to a lender, I would have known right away that they were going to need an FHA loan and would never have suggested improve your credit scores.

However, since I had to present your loan to a lender first, to do the appraisal, if they had been able to go with a conventional loan, the credit score problem would have been solved by now, because it’s much more difficult. work to improve a customer’s credit after they have already presented their loan to the lender.

The most convenient first step in the loan process, after a client has been pre-qualified, should be to obtain an appraisal. With the value determined at the beginning of the loan process, I can do a much better job of advising my client on which loan program is best suited for their situation. Not knowing the value of a home until after a loan has been presented to a lender is problematic and can cost the borrower large sums of money.

You might wonder why a client can’t just get an appraisal first and then send the appraisal to the lender with the loan file. The reason is that lenders insist that THEY will only work with an appraisal that they have ordered through your company. An appraisal might be ordered to first determine a value, but then another appraisal would have to be ordered from the lender to obtain a loan from that lender.

A side note here: If a situation arises where I have to change lenders, the client would also need to request another appraisal, as appraisals from another lender are also not acceptable to most lenders. Remember here an appraisal costs around $500 each.

This problem is called portability; the ability of a lender to accept an appraisal from another lender or from a customer. In the financial reform bill, one problem that was resolved was that lenders would be forced to accept an appraisal from a different lender, but I’m not sure if they would have to accept an appraisal from a borrower who ordered their own. I somewhat doubt it, because then the lender could say that a private appraisal may have been influenced by the borrower.

In the meantime, I have to GUESS what loan program a borrower needs, and hope the appraised value is as expected. Many times recently this has not been the case and changes to the loan program have been necessary. This act has cost my clients many hundreds, or even thousands of dollars, not to mention the hours of time wasted chasing one loan program only to discover that another was a better fit.

The law that created this debacle is nicknamed the HVCC. It is actually a rule and not a law that was created by Andrew Cuomo, the attorney general of New York, as part of a plea deal with Fannie Mae and Freddie Mac, so that they would not be subject to a state of New York. follow the law. If you want, you can search for the details of that story.

HVCC is by far the most misguided rule that dominates my industry right now. Attempts to stop it have failed in Congress due to intense lobbying by the banks that own the AMC appraisal firms that appraisers now have to work with. Others in Congress refuse to eliminate HVCC because they blame the relationship between the lender, the loan officer and the appraiser for our financial collapse. In a few cases this is true, but not in many cases, and blaming this problem is surprisingly naive on the facts of the foreclosure collapse story.

HVCC has wreaked havoc on the industry and especially on borrowers trying to buy homes or refinance their current mortgages.